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Texas
Republican Ron Paul's maverick crusade to "audit the Fed", and to
rein-in the "fourth branch" of the US-government, suffered a major
blow in the wake of the November 6th elections that saw President Barack
Obama prevailing over his Republican challenger Mitt Romney. Adding insult to
injury, the Republican Party not only failed to secure a majority in the
Senate, but it lost 2-seats. Mr Paul is the author
of a bill to audit the clandestine activities of the Fed that passed the
House by a 327-98 vote on July 25th, exceeding the two-thirds majority
needed. Astoundingly, 89 Democrats joined 238 Republicans to approve it.
Many
Republicans and some Democrats have criticized the Fed's heavy handed
activities in the marketplace, such as its multi-trillion dollar bailouts of
the Wall Street banking Oligarchs, its massive monetization of the
US-Treasury's debt, through its radical "Quantitative Easing" (QE)
scheme, and its basement of the purchasing power of the US-dollar." The
Fed has more power over the economy than anyone else in the country. Yet they
are virtually unaccountable and the American people have very little idea
what goes on behind closed doors at the Fed. The Fed operates in almost
complete secrecy, and the whole idea that they can deal in trillions of
dollars and that nobody is allowed to ask them a question is a moral
hazard," Mr Paul says. Dennis Kucinich, a Ohio
Democrat agrees, "It's time that we stood up to the Federal Reserve that
right now acts like some kind of high, exalted priesthood, unaccountable to
democracy."
Commenting on
the Nov 6th election results, Mr Paul lamented that
the US-economy has already veered over the "Fiscal Cliff," and that
the nation is being transformed into a European style socialist welfare
state. Mr Paul sees no chance of righting the ship
in a country where too many people are already dependent upon $1-trillion of
welfare assistance provided by states and the federal government. "We're
so far gone. We're already over the cliff. We cannot get enough people in
Congress in the next 5-to-10-years who will do wise things."
Mr. Paul, who
is retiring after 12-terms in the House, said "The people in the Midwest
voted against Romney: 'Oh, they have to be taken care of!' So that vote was
sort of like laughing at Greece. People do not want anything cut. They want
all the bailouts to come. They want the Fed to keep printing the money. And
they don't believe that we've gone off the cliff or are close to going off
the cliff. They think we can patch it over, that we can somehow come up with
some magic solution. But you can't have a budgetary solution if you don't
change what the role of government should be. As long as you think we have to
police the world and run this welfare state, all we are going to argue about
is who will get the loot," Paul added.
During Mr Obama's first term in office, US-federal spending
jumped +18% to a record $3.52-trillion and spending has remained constant
since then. There's never been a serious effort to cutback
on expenditures. As a result, the US-government has run deficits totaling
$5.1-trillion over the past four years. There's never been a string of budget
deficits that even remotely approaches these staggering amounts; the last
year of George W. Bush's tenure, the previous record budget deficit was
$459-billion. In order to finance these budget deficits, the White House has
mostly relied upon the Federal Reserve and foreign central banks, to buy the
lion's share of the newly auctioned Treasury debt, and to a lesser extent,
risk adverse investors fleeing the stock markets and Euro-zone bond markets,
have been avid buyers.
Scaling the
Fiscal Cliff - Now that the Nov 6th election is over, the vast majority of
the US-public is learning for the first time about a dirty little secret, -
it's called the "Fiscal Cliff," and it refers to a wicked
combination of $500-billion of tax increases and $110-billion of spending cuts
that will take effect next year, unless the Republicans in the House and the
Obama White House can agree on ways to turn the cliff into the "Fiscal
Hill." Both political parties recognize the need to pare down the size
of future budget deficits, in order to maintain the solvency of the country
over the longer-term. There is no way to avoid the fiscal cliff, and if a
recession ensues next year, both sides want to be able to win the public
relations war, by pinning the blame for the fallout on the other political
party.
The basic
Republican framework for tackling the fiscal cliff calls for a reduction in
spending on entitlements and capping social welfare programs. The fiscal
cliff also provides tax reformers with a golden opportunity to overhaul the
tax code, - by eliminating many of the deductions and credits, that reduce
tax payments from individuals and corporations by about $1-trillion per year.
Republican leaders are willing to eliminate many loopholes that
disproportionately benefit the higher-income earners and scale back
deductions for the business sector that earned $1.5-trillion in after-tax
profits in the past 12-months. "In a good-faith effort to make progress
on boosting the economy and government's long-term solvency, Republicans like
me are open to new revenue in exchange for meaningful reforms to the
entitlement programs," said Senate Minority Leader Mitch McConnell
(R-Ky.) on Nov 13th.
The War on
the Ultra-Wealthy - Mr Obama owes a big debt of
gratitude to Fed chief Ben Bernanke, who helped to engineer his re-election,
by masterminding a improbable +3,000-point rally in the Dow Jones Industrials
from the Oct 4th, 2011 low of 10,500, to above 13,500 in Sept '12. The rally
helped to boost US-consumer confidence, and lifted Obama's approval rating
with a sizeable segment of the voting population. However, now that Obama has
been re-elected to a second term, his emphasis is already shifting
180-degrees, - from boosting the fortunes of the Ultra-wealthy, - that's
heavily tied-up in the artificially inflated - stock market, - to waging war
on the Ultra-wealthy, by aiming to hike their tax rates on dividends, capital
gains, and ordinary income. Such a move is expected to raise about
$80-billion in extra revenues for the US Treasury, according to some
estimates.
Mr Obama will begin talks on the Fiscal Cliff with a
proposal to raise $1.6-trillion in new tax revenue, with 80% of the tax
increases paid by high-income earners, and 20% from Corporate America. That
means the top-1% would pay $121,000 more in taxes each year. The top 20% of
income earners would pay an average $14,000 more each year. That's important,
because the top-1% of the wealthiest Americans own 38% of the stocks traded
on the NYSE and Nasdaq. The next 9% tier of wealthy
investors control 44% of the total shares. Jacking up taxes on capital gains
and dividends and eliminating tax loopholes for Corporate America has spooked
the top-10% richest investors, into dumping their stocks before year end.
"When it
comes to the top-2%, what I am not going to do is extend further a tax cut
for folks who don't need it which would cost close to a $1-trillion. The math
does not work, in some proposals to raise taxes on the wealthy by just
closing tax loopholes," Obama said on Nov 14th. Obama said he is
"very eager" to reform the tax code, (ie
eliminate many of the tax loopholes for Corporate America), and said
entitlements like Medicare and Social Security need a "serious look as
part of a deficit deal." While there is no sympathy for the
Ultra-wealthy, the broader US-economy would be at risk of a renewed downturn,
because tackling the fiscal cliff would require some degree of "fiscal
austerity," just like in recession ravaged Europe.
At the end of
the day, no matter what amount of austerity is agreed upon, the US-federal
government is still expected to run a budget deficit of $700-billion or more.
In order to finance the shortfall, traders can expect the Obama White House
to call upon the political puppets that sit at the Federal Reserve, to create
hundreds of billions of electronically printed US-dollars through its
Infinity QE-3 program. That message has already been transmitted to the Fed.
At the Fed's October meeting, a number of Fed officials spoke about the need
to step-up Treasury bond purchases next year. Fed deputy Janet Yellen said that the federal funds rate could stay locked
near zero-percent until early 2016 in order to help keep the US-Treasury's
financing costs as low as possible. Through the Fed's totalitarian control of
credit, - financing the US Treasury can be done cheaply in spite of the
mushrooming of the national debt, - until an inflection point is reached,
where hyper-inflation begins to take-off.
The Fed
slashed the overnight federal funds rate to near zero-percent in December
2008 and has pumped $2.3-trillion of freshly printed dollars into the money
markets. In turn, investors seeking a safe haven from the debasement of paper
money, turned to Gold, - bidding-up the price of the yellow metal from $700 /oz four years ago, to above $1,700 /oz
today. The price of Silver nearly quadrupled from $9 /oz
to above $32 /oz today. Gold Bugs and Silver Bulls
alike can breathe a big sigh of relief, knowing that Bernanke will have his
fingers on the printing press in the year ahead. Since Sept 13th, the Fed has
begun printing $40-billion per month, an open-ended scheme, with no
pre-determined timeline. Mrs Yellen,
an addicted money printer, advocates a "highly accommodative
policy," even "if inflation overshoots the Fed's 2% inflation
target objective for several years," she said.
Many
investors have turned to exchange traded funds (ETF's), listed on the stock
exchanges which issue securities backed by physical holdings of Gold. Demand
for these funds has increased five-fold since July 2006. Collectively, they
hold 75-million ounces in the vaults, - that's up from 14-million ounces in
July of 2006. Gold is a highly liquid vehicle that can preserve an investor's
purchasing power over the longer-term. In fact, the central banks that are
the world's most notorious money printers were net buyers of 252-tons of Gold
in the first half of 2012, after purchasing 456-tons in the year before.
Defending the
HK$ per against the US-dollar, Given the vast amount of US Treasury debt that
will be monetized by the Fed in the years ahead, - many currency traders have
already begun to shift capital into the Hong Kong dollar, - acting as a
temporary safe haven currency. Holding Hong Kong dollars also makes sense,
since it will inevitably merge with the strenghtening
Chinese yuan. To assist in the development of the
Chinese capital markets, the authorities in Beijing have already established
a new currency - the Chinese dollar in Hong Kong that can be used by
foreigners to buy and sell equities and bonds in Shanghai.
The Hong Kong
Monetary Authority (HKMA) pegs its currency at HK$7.8 to the US-dollar, but
allows it to trade between a band of HK$7.75 to
HK$7.85. Under the arrangement, the HKMA is mandated to step in when the Hong
Kong dollar hits 7.75 or 7.85 to keep the band intact. On Nov 2nd, the HKMA
stepped into the currency market for the 10th time in less than a month by
selling HK$5-billion ($650-million) as the local currency briefly slipped
below the lower end of its trading range with the US-dollar. According to
inflow figures from EPRF Global, which tracks nearly 45,000 funds managing
more than $17.5 trillion in total assets, roughly $600 million flowed into
HK-listed funds tracking Chinese equities during the final week of October.
Equity prices
reacted quickly to the inflows. The benchmark Hang Seng
Index was up more than +5% over the past month and +14% since the last week
of September. The Fed's Infinity QE-3 scheme has raised fears in Hong Kong
because it can draw huge amount of funds from overseas to Hong Kong, and
create asset bubbles. In 2008 and 2009, more than HK$640 billion flowed into
Hong Kong in search of a safe haven, which helped double property prices. The
Hong Kong property market is buoyant despite an Oct 26th decision to impose a
15% buyers' stamp duty on non-locals.
For now, the
Hong Kong-US currency peg is safe. It is much easier for the HKMA to defend
the US-dollar by simply printing more HK$'s to buy US dollars. Hong Kong's
Exchange Fund, which is used to defend the US-dollar peg, stands at
HK$2.65-trillion ($340-billion). In its latest moves, HKMA said it injected
HK$27.2-billion into the foreign exchange market since October 20th to
purchase US$3.5-billion. Such intervention is likely to show-up in Hong
Kong's foreign currency reserves, which hit a record $291-billion in
September.
The HKMA's
foreign currency stash has been climbing on an upward trajectory for the past
five-years, and in turn, the massive injections of HK$ liquidity has doubled
the price of Gold to above HK$13,000 today. The money-printing and currency
intervention used to defend the US-dollar peg, has
caused such a big build-up of liquidity, that the overnight Hong Kong Interbank
Offered Rate stood at just 0.06 percent. Such ultra-low low interest rate
levels encourage borrowing and threaten to further inflate asset bubbles.
There are
more than 100 underground banks operating in Hong Kong that have been
increasing their positions in the Chinese yuan
since September. Overall, the growth of yuan
deposits stood at 546-billion yuan at the end of
September, with traders betting on a further strengthening of the yuan compared to the Hong Kong dollar. The Hong Kong
Stock Exchange rolled out the first yuan futures
contract in September. These activities will keep the HKMA very busy,
requiring further injections of liquidity, and helping to buoy the price of
Gold.
"Currency
Wars" is a term used by central bankers of several Emerging countries
that must take measures to either slow or stop the appreciation their
currencies against the US-dollar, in order to maintain the competitiveness of
their exporters. Worldwide, Emerging central bank holdings of foreign
currency reserves, mostly acquired through intervention, have increased +50%
over the past four years to $10.5-trillion. The Bank of Korea's (BoK) foreign currency reserve has increased +60% compared
with 4-years ago to a record $321-billion in October. Tracking the upward
trajectory of Korea's FX stash , the price of Gold
has more than doubled to just below 2-million won /oz
today.
So far this
year, the US$ has lost -6% versus the Korean won, skidding below the
psychological 1,100-Korean won level, a 13-month low. That threatens to
reduce the profits of Korea's exporters. South Korea is Asia's fourth-largest
economy, but its tiger economy slowed to a standstill in the third quarter,
due to depressed demand from abroad for its exports. Korea exported
$47.2-billion of goods in October, just +1% higher than a year earlier.
Traders are closely watching to see if Korea's ministry of finance authorizes
intervention in the currency market, after the US$ slipped below 1,100-won.
Seoul could also decide to tighten existing curbs on capital inflows. Besides
the liquidity injections by the big-4 central banks in Europe, Japan, and the
Fed, that's depressing the US's value, traders are also utilizing the South
Korean won, as a surrogate for investing in the Chinese yuan.
On Nov 7th,
the US-dollar fell to a record low versus the Chinese yuan.
In the offshore yuan market in Hong Kong, where the
yuan floats freely, the US$ was offered at
CNY6.2265, marking its weakest level since Beijing unhinged its currency in
1994. The US-dollar fell to record lows versus the yuan,
following news that China netted a trade surplus of $32-billion in October,
up from $27.7-billion in September. Beijing is allowing the yuan to inch higher in a gesture to appease the US
Treasury Department ahead of its semi-annual report on exchange rate policies
that addresses China's manipulation of its currency. However, Korea's won has
gained +3% versus the Chinese yuan since late July,
making Korea's goods less affordable in the Middle Kingdom. That could soon
prompted further liquidity injections by the Bank of Korea in the days or
weeks ahead, and helping to support the price of Gold in Seoul.
Tokyo boosts
its Intervention Pipeline, The Bank of Japan (BoJ)
has unveiled its latest effort to prevent the US$ from falling against the
Japanese yen - adding ¥11-trillion ( $138-billion) of liquidity to its
intervention arsenal, after it warned that its economy has fallen into
another recession. The BoJ is acting in response to
the Fed's "Infinity QE-3" scheme. The BoJ's
bond buying bazooka now totals a staggering ¥91-trillion ( $1.1-trillion).
Japan posted
its worst trade figures in more than 30-years, as a territorial dispute with
China and a super strong yen hit exports. Japan's exports plunged -10.3% in
September from a year earlier, weighed down by Europe's deepening recession
and a surge in antagonisms with China that have damaged close economic ties.
For the first nine months of this year, Japan 's
trade deficit widened to ¥ 4.73 trillion ($60.6 billion). On Nov 12th, BoJ chief Masaaki Shirakawa
said the central bank will continue to pursue nuclear QE - taking into
account the risk that a stronger yen hurts Japan's economy.
So far,
"the BoJ's powerful monetary easing has had
limited effect in stemming the yen's strength," Shirakawa
said on Nov 12th. He warned there is no clear relationship between increasing
the size of Japan's high powered money supply (monetary base), and the yen's
exchange-rate moves, countering views held by some lawmakers that the BoJ could weaken the yen by pumping vast quantities of
liquidity into the Tokyo money market. Still, Japanese companies have been
badly hurt by the worsening Euro-zone economy, and the side effects of a
super strong yen exchange rate against the Euro and the US-dollar. In the
July-to-September quarter, the net income earned by 191-companies listed in
the Nikkei-225 index, plunged by -31% on average compared with a year ago..
Shinzo Abe, the chief of Japan's Liberal Democratic Party
(LDP) and frontrunner in next month's election, wants the Bank of Japan to
lower short-term interest rates below zero-percent in order to weaken the
yen. Signs that the LDP will step up efforts to weaken the yen if it comes to
power lifted the US$ to ¥ 81.24 today, its
highest since April 27th. Abe, a vocal critic of the BoJ,
has called for setting a +3% inflation target, three times the current 1%
target, and for the bank to inject "unlimited liquidity" until the
inflation target is hit, while cutting the BoJ's
0.1% policy rate to zero or below.
Already,
Japan's monetary base has been increased to ¥128-trillion, up from
¥88-trillion four years ago, but the easing hasn't been able to overcome
the powerful effects of the Fed's own Zero Interest Rate Policy, (ZIRP) and
QE-scheme. The BoJ has been able to manage a dirty
float, - pegging the US's value within a very narrow range between ¥81
and its historic low of ¥76. The US Treasury has given its approval for
the yen's dirty float, because Tokyo recycles the US-dollars it acquires
through intervention, into US Treasury notes, thereby helping the Fed to
finance the US-budget deficit at artificially low interest rates. Japan has
boosted its holding of US Treasury notes by $207-billion since August 2011.
Still, the biggest winner from this backdoor QE arrangement between the
Japanese ministry of finance and the US Treasury, - is the price of Gold in
Tokyo has doubled from four years ago to ¥140,000 /oz
today.
Under the new
QE target set on October 31st, the BoJ would have
to pump ¥31-trillion more into the banking system via asset purchases and
market operations by the end of next year. That would add to the BoJ's already increasing presence in the local bond
market. However, Japanese banks have parked a record ¥ 44.2-trillion
($566-billion) of excess cash with the BoJ. It
suggests that the money the central bank is pumping into the banking system
is piling up in its own reserve account instead of being funneled to broader
sectors of the economy, casting doubt on what more the central bank can do to
stimulate growth.
The
continuation of the "Currency Wars" is expected to extend into
2014, leading to a further expansion of the world's supply of paper currency
- and providing a favorable backdrop for the precious metals markets,
especially Gold and Silver. Ultra-low interest rates are another supporting
factor. Still, it's not a straight line upward for Gold. There are pullbacks
along the way, sometimes triggered by slumping commodity prices, which react
negatively to signs of economic downturns in the Asian, European, US and
other global economies.
In the
Euro-zone, factory output plunged -2.5% in September, its steepest fall since
January 2009. Germany's industrial output, - the engine of the Euro-zone
economy, fell -2.1% in September, showing it's no longer immune to the
deepening recession. Industrial output also fell -2.7% in France and -1.5% in
Italy. Japan's economy contracted at an annualized -3.5% in the three months
through September, and will probably shrink further in the fourth quarter.
The US-economy could stumble into a mild recession, as it's forced to adopt
some measure of austerity, all of which can exert selling pressure in the
commodities markets. Gold and Silver would be rattled at times, however, ----
"You
have to choose between trusting the natural stability of Gold and the honesty
and intelligence of members of the government. With due respect for these
gentlemen, I advise you, as long as the capitalist system lasts, to vote for
Gold," - George Bernard Shaw, 1928.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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